It's been a good year for watch and jewellery-maker Titan with sales up a sparkling 31 per cent y-o-y at Rs 1,440 crore and the operating profit higher by 30 per cent y-o-y at Rs 154 crore. For the first time, jewellery sales have overtaken sales of watches, though the latter remain more profitable. However, much of the shine has come off the numbers because of the flat operating margins, which were a dull 10.6 per cent.
In fact, margins in the March quarter crashed 600 basis points thanks to raw material pressures, despite the topline growing by an excellent 33 per cent. The bottomline for FY06 has seen a dramatic improvement: at Rs 73.62 crore, the profit after tax was up nearly 200 per cent. What has helped are the lower provisions for bad debts and lower expenses on interest. The good news is that both Titan and Tanishq grew faster than they did in FY05, a sign of the brand equity that they have achieved.
With higher sales, tipped to grow at a compounded 24 per cent in the next couple of years, economies of scale should begin to kick in, leading to better margins of over 11 per cent. The sales-to-capital employed ratios for both the divisions have been continuously improving: in FY06 it increased to twice from 1.55 times for watches, while for jewellery it increased from 5.31 to 5.77 times. Titan's strategy in the jewellery space has been to straddle all segments and it is well poised to cash in on the huge opportunity, estimated at Rs 55,000 crore.
It has entered smaller towns in a bid to capture the investment demand for gold. The company has recently introduced high-end watches and one of its biggest strengths lies in the huge retail network that it has built. At the current price of Rs 645, the stock trades at 27 times estimated FY07 earnings and 20 times FY08 estimates and while it may seem a trifle expensive, it is a good play on the growing demand for branded products.